The authors note that, very simply, Section 956, both prior to and under the new Tax Act, prevents US corporations from realizing benefits from overseas earnings “onshore” without first paying a tax on those earnings.

The paper then presents a detailed review of the Tax Act’s multiple changes to the tax treatment of earnings and profits of foreign subsidiaries and their complexes, which include an expanded definition of “United States shareholder” for the purpose of controlled foreign corporation (CFC) rules.

The overall takeaway: Parties to credit facilities with multinational companies are well-advised on both the borrower and lender side to review the structure and modeling of their collateral packages in light of the provisions of the Tax Act (whether domestic parented or foreign parented).

The paper next discusses the Tax Act’s new 30% Limitation on Interest Deductions for net “business interest” expenses for tax years beginning after December 31, 2017.

Such limitation is generally applicable to borrowers such as partnerships and corporations but specifically excludes real estate mortgage investment conduits (REMICs), businesses with gross receipts less than a $25 million threshold, businesses that operate in certain industries and floor plan financing interest.

The authors suggest that in response to this provision borrowers may reevaluate their capital and structures and debt/equity mix.

It is likely that some borrowers will seek to reduce their overall interest expense by reducing unsecured, junior, mezzanine and/or other high interest rate debt and issuing additional secured debt or equity.

Next, with regard to the major driver of the Tax Act, the reduction of the federal corporate income tax rate to 21%, the authors suggest this will lead some borrowers to reevaluate their “choice of entity” decisions. As a result, corporate tax treatment may become more desirable than the various pass-through entities under which many US private company borrowers currently structure themselves.

Overall, while the Tax Act’s impact on leveraged financing transactions is not as great as it would have been if Section 956 had been repealed, as discussed in the article, several of its aspects will likely influence the structuring of these transactions.

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